Minnesota Supreme Court Abolishes Ancient Doctrine of Champerty and Finds Litigation Funding Agreement Enforceable

On June 3, 2020, the Minnesota Supreme Court abolished, under Minnesota law, the common law doctrine that champertous agreements are unenforceable. This is an important decision for the litigation funding industry, and the Court’s opinion highlighted certain benefits of litigation funding.  

Champerty is defined as “an agreement to divide litigation proceeds between the owner of the litigated claim and a party unrelated to the lawsuit who supports or helps enforce the claim”[1] and, as the Minnesota Supreme Court noted in its decision, dates back to ancient Greece and Rome and medieval England.

The Minnesota case involved a personal injury claim by Pamela Maslowski who entered into a litigation funding agreement with Prospect Funding Partners LLC. Maslowski sold Prospect an interest in her personal injury claim in exchange for $6,000. In return, if Maslowski recovered damages, Prospect was entitled to receive its capital back as well as a processing fee and annual interest based on a set schedule. Prospect’s total “repurchase” was capped at a specified amount.  Maslowski eventually settled her personal injury case and then filed an action in Minnesota state court seeking a declaration that the Agreement was invalid for certain reasons including champerty.  The Minnesota trial court applied Minnesota law and found the Agreement unenforceable and void because it violated Minnesota’s prohibition against champerty and maintenance. The Minnesota appellate court affirmed the trial court’s decision.

The Minnesota Supreme Court reversed and remanded the lower court’s decision and abolished the doctrine of champerty in Minnesota. The Court’s opinion stated that champerty is a common law doctrine, and as society changes, “the common law must also evolve.”

The opinion also highlighted the importance and benefits of litigation finance. The decision noted:“[M]any now see a claim as a potentially valuable asset, rather than viewing litigation as an evil to be avoided. The size of the market for litigation financing reflects this attitudinal change. Businesses often seek financing to mitigate the risks associated with litigation and maintain cash flow for their operations.” Additionally, the Court pointed out that it is not likely that litigation funders will fund frivolous claims “because they only profit from their investment if a plaintiff receives a settlement that exceeds the amount of the advance—an unlikely result in a meritless suit” and that funders have claim valuation procedures to avoid this very problem.  

The Minnesota Supreme Court also stated what many funders have advocated for some time, namely that litigation financing permits claimants to have access to justice. As the Court said: “… [W]e permit such arrangements because they allow plaintiffs who would otherwise be priced out of the justice system to assert their rights. We believe the same is true of litigation financing.”

Minnesota joins a growing list states that no longer recognize champerty. This trend should further the significant growth of commercial litigation finance in the United States and result in increased acceptance by claimants, law firms, and investors.

^{[1] Champerty, Black’s Law Dictionary (11th ed. 2019)}